Perpetual swaps, also called perpetual futures or “perps” for short, are the dominant trading instrument in the crypto market, processing an estimated $40 to 50 trillion per year in volume. They dwarf spot trading and are the product that professional traders, hedge funds and retail speculators seek when they want leveraged exposure to the price of bitcoin or others without owning the underlying asset. Despite their ubiquity, the mechanics that make them work are not widely understood.
To understand perpetrators, it helps to understand what came before them. In traditional finance, leveraged exposure to an asset typically comes through a futures contract, an agreement to buy or sell something at a set price on a set date. When that date arrives, the contract expires and is wound up. Traders who wish to maintain their position must roll it into the next contract.
In the early days of crypto, this practice created persistent problems. Futures trade at a premium to the spot price of bitcoin, a concept known as a basis that confused retail traders who wanted straightforward directional exposure. And every time a contract expired, positions were closed, regardless of whether traders wanted it. BitMEX, the derivatives exchange founded by Arthur Hayes and Ben Delo in 2014, spent the better part of a year shortening the duration of the contract trying to fix this, moving from quarterly to monthly to weekly to 48-hour to 24-hour expiration, but none of it was enough.
A contract that never expires
The perpetual swap, developed by Delo and launched by BitMEX in 2016, solved the problem by eliminating the expiration date entirely and creating a derivative contract that tracks the price of an asset indefinitely. There is no settlement date, no rolling and no expiry. Traders can hold a position for hours or years. This created an immediate structural challenge: without an expiration date to act as an anchor, nothing would naturally force the contract price back toward the spot price of the underlying asset. BitMEX solved this through a mechanism that has since become the industry standard.
Every eight hours a payment is exchanged between traders on opposite sides of the market. If the perpetual swap trades above the spot price, indicating excessive demand for long positions, traders who are long will pay traders who are short. If the perpetual swap trades below spot, the payment runs the other way. The exchange does not intersect. The rate of this payment, known as the funding rate, is calculated based on how far the perpetual swap price has deviated from the spot during the previous eight-hour window. The longer the deviation, the higher the rate. This creates a self-correcting equilibrium. When longs are charged a significant funding rate, it becomes expensive to hold the position, reducing demand and pulling the price back toward spot. Market makers speed up this process by shorting the perpetual swap and buying spot when a meaningful premium opens, capturing the difference as profit. The funding rate mechanism is now used, in much the same form, by all major derivatives exchanges in the world.
The role of leverage
The other defining feature of perpetual swaps is leverage. Most exchanges allow traders to control positions significantly larger than their deposited capital, with limits varying by platform and jurisdiction. At BitMEX in its prime, leverage of up to 100 times was available, meaning that a 1% movement in Bitcoin’s price would result in a 100% gain or loss on a fully leveraged position. To manage the risk this creates for the exchange, perpetual swap platforms use automated liquidation systems. If a trader’s loss approaches the value of their deposited margin, the system closes the position before it can go negative, protecting the exchange from absorbing the loss. The speed and reliability of this liquidation engine became a key competitive differentiator in the early years of the market and remains central to how exchanges compete today.
Perpetual swaps are now the primary place for price discovery in crypto. When bitcoin moves strongly, the move typically originates in perp markets before spreading to spot. The structure Delo built in 2016 has proven durable enough that regulators in the US are now exploring its application to traditional assets, with CME potentially listing perpetual swaps on equities. What began as a solution to the limitations of crypto futures has become one of the most traded financial products in the world.
